Exam 3: Decision Analysis

The several criteria (maximax, maximin, equally likely, criterion of realism, minimax regret)used for decision making under uncertainty cannot lead the choice of the same alternative.

The optimistic decision criterion is the criterion of

Suppose that the payoff from an investment depends upon market conditions.A great market has a payoff of $200,000, a normal market has a payoff of $100,000, and a poor market has a payoff of $20,000.What is the Laplace criterion value?

The three decision-making environments are decision making under

How are decision tables organized?

Mark M.Upp has just been fired as the university bookstore manager for setting prices too low (only 20 percent above suggested retail).He is considering opening a competing bookstore near the campus, and he has begun an analysis of the situation.There are two possible sites under consideration.One is relatively small, while the other is large.If he opens at Site 1 and demand is good, he will generate a profit of $50,000.If demand is low, he will lose $10,000.If he opens at Site 2 and demand is high, he will generate a profit of $80,000, but he will lose $30,000 if demand is low.He also has the option of not opening at either site.He believes that there is a 50 percent chance that demand will be high.A market research study will cost $5,000.The probability of a good demand given a favorable study is 0.8.The probability of a good demand given an unfavorable study is 0.1.There is a 60 percent chance that the study will be favorable. (a)Should Mark use the study? Why? (b)If the study is done and the results are favorable, what would Mark's expected profit be?

The concessionaire for Carnegie Hall has developed a table of conditional values for the various alternatives (stocking decision)and states of nature (size of crowd). The concessionaire has no idea what sort of crowd might materialize - it has been decades since the Del Aires last performed together, but there has been a resurgence in interest thanks to a re-release of the classic movie Horror of Party Beach.Determine: (a)the expected value of perfect information for this scenario. (b)the optimal choice using the Laplace criterion.

Sensitivity analysis assumes no increasing or decreasing economies of scale.

The ABC Co.is considering a new consumer product.They believe there is a probability of 0.4 that the XYZ Co.will come out with a competitive product.If ABC adds an assembly line for the product and XYZ does not follow with a competitive product, their expected profit is $40,000; if they add an assembly line and XYZ does follow, they still expect a $10,000 profit.If ABC adds a new plant addition and XYZ does not produce a competitive product, they expect a profit of $600,000; if XYZ does compete for this market, ABC expects a loss of $100,000. (a)Determine the EMV of each decision. (b)Determine the EOL of each decision. (c)Compare the results of (a)and (b). (d)Calculate the EVPI.

A manager is deciding whether or not to build a small facility.Demand is uncertain and can be either at a high or low level.If the manager chooses a small facility and demand is low, the payoff is $100.If the manager chooses a small facility and demand is high, the payoff is $300.On the other hand, if the manager chooses a large facility and demand is low, the payoff is -$200, but if demand is high, the payoff is $800. (a)What would be the best decision based on the Laplace criterion? (b)What would be the best decision based on Hurwicz's criterion of realism using α = 0.6?

The decision maker can control states of nature.

Which of the following is not a characteristic of a good decision?

In a decision table, all of the alternatives are listed down the left side of the table, while all of the possible outcomes or states of nature are listed across the top.

Orders for clothing from a particular manufacturer for this year's Christmas shopping season must be placed in February.The cost per unit for a particular dress is $20 while the anticipated selling price is $50.Demand is projected to be 50, 60, or 70 units.There is a 40 percent chance that demand will be 50 units, a 50 percent chance that demand will be 60 units, and a 10 percent chance that demand will be 70 units.The company believes that any leftover goods will have to be scrapped.How many units should be ordered in February?

A rational decision maker must choose between two alternatives.Alternative 1 has a higher EMV than Alternative 2, but the decision maker chooses Alternative 2.What might explain why this occurs?

The Laplace criterion represents a compromise between the maximax and maximin decisions.

EVPI (expected value of perfect information)provides the decision maker a value of the lowest amount she should be willing to pay for additional information.

The EMV approach and Utility theory always result in the same choice of alternatives.

What is the range of the Hurwicz criterion coefficient of realism α?

In decision theory, we call the payoffs resulting from each possible combination of alternatives and outcomes